The liability of selling your RMR

How you define the value of your RMR may be different than how a buyer would define it. Lee Jones examines some underlying basics of RMR sales and myths associated with such sales.

It is quite common for owners of contracts that produce recurring monthly revenue (RMR) to consider selling the contracts at some point in their business cycle. If this sounds like you, then remember that a little foresight and planning can add a great deal of value.

First, you should know that quite often when the after-tax proceeds are distributed from the sale of RMR contracts, the former owner of those contracts wonders if the true value of RMR contracts might have been the good job security he or she once had. Sure, they have money in hand, but they no longer have that trusted chair to sit upon that we call RMR.

Job security, of course, is one of the reasons for the very wide gap between buyer and seller expectations when considering a sale, and I would argue that it is a common reason why so many deals do not get done. And this is partly why the United States still has such a large number of small local alarm security suppliers, a.k.a. “dealers”. What we see also in the variance between seller and buyer contract valuations is that a seller might feel the need for a multiple of 40 to justify the sale, even if the real market value to a buyer might be a 20-times multiple.

RMR contracts can be encumbered by many different entities, so the asset value of the contract can be fragmented too, just as our industry is fragmented by a high number of independent alarm dealers. Generally the factors that can come into play to affect the multiple value of an RMR contract include the following:

The Customer

Sales

Installation

Monitoring

Billing & Collection

Warranty & Service

Employee Agreements

Federal/State/Local government

Banker/Investor

Private Response

Local Police Response

Each of the listed parties to the contract could have a tether to the contract value and its liquidity. The more pieces of contract performance that are provided or controlled by a single source, the greater the asset value for the single source is. For example ADT, Stanley/HSM, Brink’s (now Broadview Security) provide and control most of the performance roles, whereas many of the smaller alarm suppliers only control one or two of the roles. Consequently the market value of the contract and net worth of the alarm supplier can be vastly different.

What I’ve found is that there are some basic “myths” that are generally believed in our industry when it comes to selling your RMR. Let’s take a look at four of these myths, because by dispelling them, you can be more realistic about purchasing or selling alarm contracts.

Myth #1 -- The buy/sell prices are determined by “multiple of RMR”.False. The foundation of the buying and selling price will generally be “ROI”, which is the traditional accounting formula of return on investment by the buyer. ROI answers the question of “Can I make money from this deal, and how much money over what period of time?” Multiples of RMR is a sloppy benchmark for measuring the transaction when it has been completed, but is not practical for measuring a sale before it is closed. It is a sloppy measurement because the raw number does not deliver the whole story. For example, a multiple of 40 paid out of earnings over 10 years could be the same as a 20-times multiple of all cash at closing. Basically, a high multiple with future obligations could equate to a much lower multiple, all cash, without any legacy responsibilities.

Myth #2 -- Money is the primary motive to be a buyer of RMR contracts.
False. Other motives can have equal or greater value to a buyer than money, including buying a company for key employees, or to take out a competitor, or to expand geographically, or to achieve difficult licensing requirements. Of course these motives also relate back to ROI. Due diligence by the seller is just as important as due diligence by the buyer. The seller and buyer should have equal advantage in the negotiations.

Myth #3 -- Police emergency response is an integral part of the RMR contract.
False. The police have no obligation to your private customer contract. For decades the local police have been a core value of the infrastructure of the alarm Industry and was assumed to be part of the RMR contract. However, police all across the country are losing confidence in monitored alarm systems due to decades of near total error through false alarms. The police alternative is to remove the emergency priority, turning from fast and reliable emergency response to slow and unreliable courtesy visits. Buyers of RMR contracts are beginning to compare local 911 response times with actual alarm response times and then matching the results with the RMR customer expectations. The wider the gap is, the greater there is a need for private response or updated verification monitoring. And this can significantly impact ROI. Historical standards no longer add future value.

Myth #4 -- All RMR contracts have the same value.
False. Contracted RMR can come from multiple sources, including 24/7 monitoring, fire inspections, real estate, maintenance and service contracts. In addition, there is potential revenue from installations and product sales. A closer examination of selected customer contracts could determine that some customers are not charged enough or too much. Both case can impact attrition. A good buyer will analyze each revenue source to determine the earnings potential and long-term sustainability.

Additionally related to Myth #4 is the that we reference the RMR contract document as the primary asset of security suppliers. But we also know that these customer contracts have had decades of legal evolution. Consequently a seller should be giving their documents careful consideration before the negotiations start. Some of the early agreements will allow liability to follow the seller even after the sale. And some of the RMR documents could be interpreted as deceptive business practices, negating nearly all value. It is not uncommon during negotiations to see a buyer remove large numbers of contract assets or downgrade the value due to these legacy liabilities. If they would not fit a prospective buyer, they should not continue to fit the seller either, and should be fixed to preserve or add value.

There's one final piece of advice for those of you considering selling your company along with your contracts. Don’t be insulted if some prospective buyers do not want the operating company. The firm can have years of local goodwill supported by thousands of dollars of promotional costs, yet be of little or no value in the buyer’s eyes when compared to the contracts. That’s yet another reason sellers and buyers should “update their profile” just like they would at an online matchmaking site before seeking the most compatible mate.

About the author:Lee Jones is president of Support Services Group. He is a 35-year veteran of the alarm industry who specializes in business development and buy/sell planning.